Investors are picky on the levels where they are willing to buy long-dated US Treasuries. Last night's 10Y auction tailed by 3bps with a dealer takedown of 17.9%, driving the UST curve another leg steeper in the process. 10Y yields are now at 3.94%, some 26bps higher than the low of 3.68% registered on Monday. To be sure, sentiment has stabilized somewhat over the past two trading days. however, we suspect that there would still be some lingering haven demand. Much of this is manifested in the short end, where 2Y yields closed below 4%. Market participants are leaning towards the view that the Fed may want to get back to neutral at a faster pace. However, the long-end tends to be dictated by more factors including fiscal worries. We note that the percentage of dealer holdings in US Treasuries are approaching levels seen in 2018 when there was a repo crisis. If bank balance sheets are stuffed with assets, there may be less room to extend liquidity and may partially explain why elevated SOFR fixings are becoming more common. This could well be early signs that Fed QT may have to end within the next two quarters. Meanwhile, watch the 30Y auctions tonight to see if investors find 30Y yield at 4.25% sufficiently palatable.
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